STIGMA/DEPRECIATION LITIGATION

Real Estate Stigma

An adverse public perception regarding a property; the identification of a property with some type of opprobrium (environmental contamination, a grisly crime), which exacts a penalty on the marketability of the property and hence its value.

B Source, The Dictionary of Real Estate Appraisal, American Appraisal Institute


 

I fell into the specialization of real estate around 1981 when the Canadian federal government banned the use of Urea Formaldehyde Foam Insulation or UFFI for being a dangerous product in respect to health issues. It was estimated that more than 100,000 properties across Canada had UFFI installed with most being in Ontario. I was asked by one homeowner to estimate the loss in value due to UFFI which was very daunting as no houses with UFFI had sold at that time. I had no footprints in the snow to investigate. Using an extraction method, I developed a formula based on the house having no value but that the land, the trees, the garage, etc. did and so I came up with a figure which was in compliance with government policy at the time.

I found it fascinating but I was somewhat baffled by the concept that once UFFI was removed what was the public perception and a new avenue of study that has occupied now four decades was to unfold. Eventually my name got out to people in UFFI groups and during the next ten years I opened more than 1,000 files on UFFI. It got easier as UFFI houses were sold on the open market and stigma could be measured. I started testifying in court about UFFI litigation actions and I estimate that led to between 70 to 80 trials. One was for the Toronto Police who laid fraud charges against a seller for lying about the presence of UFFI when he sold. Some cases involved the actions of Realtors which opened a new path for me as matters of real estate agency became another area of expertise for me.

As I delved more into this fascinating aspect of valuation other stigma issues were brought to me by lawyers and as the internet broadened the public found me. I have no idea of the number of stigma situation reports that I have written nor or the number of trials that I have given expert witness in but they have been numerous and my work has taken me across Canada and other countries.

When I tell people that I specialize in litigation relating to real estate agency and to real estate stigma, even lawyers and Realtors ask me to explain what I mean by Areal estate stigma.@

I developed a seminar about stigma issues for Realtors, which I offer through real estate boards because of the lack of understanding on the subject and the legal aspects of disclosure of all facts. Over the years thousands of Realtors have taken my seminar on this subject.

With the advent of marijuana grow houses or Agrow-ops@ a new sector of stigma opened and eventually I was writing articles on this subject and travelling across Ontario. Marijuana may be legal now in Canada but the problems associated with illegal grow-ops will not go away.

Notorious properties probably have garnered some media attention. Unfortunately today, save for small communities, a police raid on a grow‑op may not be of media interest due to the multiple of incidents. Your Realtor should always go into the local MLS system as far back as possible to search a subject property. Buyers are cautioned, always use multiple search engines and search a property address, if notorious, it may pop up.

 

Murder/Suicide

Say that you bought a house and found out from a neighbour that it had been the scene of a horrific murder. You are angry, and you want to sue the Seller, and the listing and selling agents. In most jurisdictions, you were denied the right to a material fact. In some American states, such as California disclosure of a murder must be reported for three years. The problem with undisclosed murder or even suicide is that in Canada courts do not rule in favour of psychological perceived depreciation. Unless someone corrects me, I have yet to find a court case in Canadian courts that has ruled that a murder, a suicide or haunting has contributed to depreciate a property=s market value. In Canada, only Quebec has a murder disclosure law.

How does one measure the loss B if any? In a textbook situation, we would find various murder sites, compare their selling prices to similar and non‑impacted houses in their area and then with enough data estimate a percentage loss to the subject house.

 

Disclosure Limitations

Did you know that in the Province of Ontario there is no Statute of Limitation on disclosure? Whereas in so many American states there are time lines about disclosure, in Ontario it seems to be forever. Say that a property was contaminated back in the 1950s and remediated, it still has to be disclosed to a potential buyer today. There is nothing in legislation stating that remediation negates disclosure.

Checking across Canada, I have not found limitations on disclosure. A new law is needed as it is just not fair to sellers and Realtors who are drawn into lawsuits based on a property=s history. It would be fair to estimate that without limitations, hundreds of thousands of stigmatized properties exist in Ontario as one goes back even a hundred or more years.

Former marijuana grow operations or grow ops are easier to estimate a loss because there are comparable sales. Many former grow ops have been bought solely for land value but many renovators have upgraded a former grow op and resold without disclosure to a buyer who only learns of the deception once a neighbour mentions the history.

The issue that faces an expert in valuation about stigma is that not all stigma issues can be easily measured. The courts want comparable data, proof of how the public has reacted and that proof many not be always be available.

A true test for the realization of a stigma is simple, if the issue is disclosed to a mortgage lender will they lend against the property and what about an insurer, will they issue full insurance coverage. If the answer to either or both is to the negative then stigma is established.

 

Ghosts

Hauntings, like exemplified by Hollywood are not common but many people believe in haunted houses and surveys have shown that the belief in ghosts. In a Huffington Post survey, 45% of Americans believe that ghosts are real. I would expect that Canadian figures would also be high.

Is a haunted house real? According to the New York Supreme Court they are. Read about the famous court case, the AGhosts Nyack@ or use this link,

http://atlasobscura.com/place/the‑ghost‑of‑nyack.

I have researched this area for decades as have lawyer friends of mine, to the best of our search abilities we have not found a haunted house case that has come before a court in Canada, save for one case in Kitchener, Ontario where someone started a rumour about a haunting that the owner felt could stigmatize his property.

 

Mould 

I would estimate that a good half or more of the cases I have had with stigma over the past years have involved mould. Realtors do not seem to ask the right questions of sellers and sellers are not always forthcoming. If a roof or basement has leaked, save for a one-off incident the chances are that mould have formed in the house, unless treatment was undertaken immediately.

In a recent case the seller disguised former roof leakage and within a week of moving in the new owner found such extensive mould behind the walls throughout the house that the house was rendered unliveable.

Another issue that I have found over and over, buyers hire the cheapest home inspector and in many cases the inspector did not find any problems despite big black mould blotches on walls. Although inspectors do not look for mould a professional inspector will comment on what he or she observes and then instruct a buyer to have a mould expert retained. I have seen too many cheap inspectors do terrible reports. A home inspector is somewhat akin to having insurance.

 

Cases

I have lost track of all of the cases in which I have testified. In Ontario I know that I have testified in a minimum of 500 trials and probably closer to 600. As well, via electronics, I have been sworn in by a Toronto lawyer, linked to American courtrooms and have testified remotely. The next step will probably by via video conference.

My reports have gone to courts across the globe and have been translated into many languages. I know as I have had to sign declarations.

For every trial that I eventually do attend at least 10 or more reports settle before trial. I cannot estimate the number of reports that I have completed for litigation matters but the numbers are in the many thousands, based on a career in this field that started back in the 1970s. 

Many of my trials can be found on the website, https://www.canlii.org/en/ which is published by the Canadian Legal Information Institute.

 

FAQS

What is Real Estate Stigma?

A stigma is a brand, a mark of disgrace.

In real estate it is about branding a property but it goes further. It is about the loss or diminution of value that lingers after the costs to remediate.

For example, you can clean up an oil spill from a buried tank but if the property were to be sold 1) you would have to disclose the former issue and 2) even if cleaned to exacting specifications a buyer would not necessarily be satisfied that clean is really 100% clean.

Note, disclosure itself can cause a stigma. Having to wave the proverbial Ared flag@ in front of a buyer may depreciate the property just because they are troubled by a past event.

Is Murder or Suicide a Stigma Factor?

This is interesting. In Canada only the Province of Quebec has any regulations that a murder must be disclosed to a buyer. In other provinces there is no obligation to disclose a murder, a suicide or any death.

For a Realtor, although disclosure is not mandatory it is good business practice to make the disclosure as neighbours gossip and eventually a new buyer will find out and no one wants an angry former client in this age of social media postings.

About suicide – I have been advising people for years to simply say that an unnatural death occured, that I have no other details but it was not a murder. The family wants their privacy respected. The disclosure is made, the details remain private.

And of course what about someone who falls down a flight of stairs or in the bathtub and dies? There is no reason to disclose that.

What About a Natural Death?

Read obituaries today, Adied peacefully at home surrounded by their loved ones.@ That is common. Any house of an age may have had multiple natural deaths. There is no reason to disclose a natural death nor an obligation. Some buyers may want to insert a clause asking the Seller if there had been a death and that must either be answer honestly or striken out of the offer.

How Long Does Stigma Remain In Place?

In the Province of Ontario and other provinces, forever! There is no Statute of Limitations. In states like California, a murder must be disclosed but only within the first 3 years. We have nothing like this in place.

Many buyers have bought unreported stigma houses without knowing it because the former sellers omitted to disclose. I have seen many situations where a buyer finds out about a stigma, say a former marijuana grow operation but when examining the Seller they find out that the Seller had been lied to as well when they bought.

Ontario needs a Statute of Limitations, long overdue.

What About Mortgage Financing and Stigma?

As at this writing, no A- Lender will advance a mortgage on a former marijuana grow operation (grow-op). With other issues such as contamination it varies with each lender but all will want proof of certified remediation.  The former issue of Urea Foam Formaldehyde Insulation (UFFI) has mostly declined.

What About Insurance and Stigma?

If disclosed, some insurers will either, 1) decline to insure, 2) rate the policy with higher costs or 3) only give limited coverage.

If insurance is a problem, obtaining a mortgage will be impossible.

Are Haunted Houses Real?

Yes. But only because of this statement, Astigma is depreciation real or otherwise when it is perceived to be real by the public. Although no haunted house litigation has ever been tried in Canadian courts (I have researched for some years) one should read about the Ghost of Nyack where the New York Supreme Court ruled that a haunted house was real because of public perception. In Canada, it would be almost impossible to take a claim of a haunted house through our court system, but I am sure that someone will try to one day.

Does Stigma Dissipate?

The good news is that eventually stigma issues will diminish. A notorious murder will fade from the public eye, a former chemical spill will not linger as years go by. Studies has shown that 5-7 years and the highest impact of stigma will decline.

What is the Percentage Loss of a Stigma?

In a study that I undertook for the Toronto Star in September of 2011, a former marijuana grow op house in Toronto sold for about 20% less than unimpaired market value.

Stigma can vary from a low of 5% to a high figure where a building has to be demolished or land dug up and remediated. In extreme cases there can a negative value as the cost of the cure, or remediation can exceed the market value. In a retail shopping plaza situation the market value was $3 Million but the best quote to clean out the discovered underground contamination was $4Million. An extreme situation but it does occur.

For residential properties, the figures vary and must be estimated on a per assignment basis.

What Happens if I Find Out About a Stigma Factor After I Closed My Deal?

Here are the steps:

  1. there are few real estate appraisers who can deal with stigma issues. Find one and ascertain the loss in value. If it is high enough, it is worth suing. If not that high, sorry, the costs to have your day in court are not warranted.
  2. find a real estate lawyer who understands the issues of stigma. Again, not all lawyers can handle a stigma case.
  3. if you proceed you sue everyone who handled the file, your Realtor, the listing Realtor, the sellers, possibly a home inspector (if you had employed one) and in some cases, municipalities and third parties who may have caused the issue (think of an owner from an adjacent property who allowed chemicals to travel to yours).

Costs are high to pursue this type of litigation and the process can take a couple to a few years. Be prepared for delays in the court system, the process. Work with your lawyer on the important issues as every time you call or meet the meter will be ticking.

Barry Lebow and Stigma

I may be one of the few experts in the stigma process in Ontario. To date, I have testified in between 500 to 600 trials with a good part pertaining to either stigma, real estate agency or both combined. There are also few experts who testify about agency matters. I am the only expert who combines both aspects.

My fees are reasonable, my reports stand up in court and I have worked with and for some of the finest litigators in Ontario.

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Note: The answers herein are not to be considered independent legal advice or any other advice outside of the expertise of real estate transactions solely. Any party who wants to consider an answer herein should seek independent legal or other professional advice before proceeding.